Tax Law.Study Guide Ch 11 PDF

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Chapter 11 30 June 2020 Tax Law

Chapter 11 – Fringe benefits tax Objectives The aim of this chapter is to introduce students to the basic concepts in the operation of the fringe benefits tax (‘FBT’) in Australia, and how the FBT is calculated each year .

CHAPTER 11 – Fringe benefits tax - OVERVIEW: 1. 2. 3. 4. 5. 6. 7. 8.

Introduction and terminology Imposition of FBT Summary of benefits types Car benefits Expense payment benefit Reporting of FBT on PAYG Payment Summaries Conclusion Suggested solutions to the Review Activities

1. INTRODUCTION AND TERMINOLOGY 1.1

Policy reasons for FBT

$ Reading:  Text at paragraph 26-000. Prior to the introduction of the Fringe Benefits Tax Assessment Act 1986 (Cth) (‘FBTAA’), employers could supply their employees with fringe benefits and there would be no tax payable by the employee or the employer. It was a win/win for employers and employees, and lose/lose for government revenue. The former provision s 26(e) of the ITAA36 (which has now be rewritten as s 15-2 ITAA97) tried to tax benefits, but it only had limited operation as it only required the ‘value’ to the taxpayer of benefits granted in relation to employment be assessed as income. This was ineffective as many taxpayers simply undervalued the benefit. The reasons s 26(e) was seen as ineffective included:

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employees were required to disclose the benefit provided in their income tax return. They either did not know this or played ignorant;

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it was too difficult for the Tax Office to detect the non-cash benefits provided to some 2 million employees;

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the amount was the ‘value to the taxpayer’ – which was difficult to define; and the

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

the allowance, benefit, etc had to be given to the taxpayer to be caught under s 26(e) – the law was not effective if the benefit was given to the taxpayer’s spouse, etc.

The previous situation was also seen as unfair, because an employee could receive many fringe benefits instead of a cash salary (which is taxed). Employees would only pay tax on the cash salary. The fringe benefits would be tax free to the employee, but would often still be a deduction for the employer. EXAMPLE An example of the treatment of fringe benefits prior to 1986 is as follows (assume a flat marginal tax rate of 45%): Felix is an employee on a salary of $180,000. His employer wants to give him a pay increase. If his salary is increased by $10,000 cash, then Felix will get only $5,500 in his hand. (Tax rate is 45% à amount of tax is $4,500.) Instead of a pay rise, the employer gives him a fully maintained company car. The leasing costs of the vehicle are $10,000 per year that the employer meets.  



The employer wins because they get a tax deduction of $10,000 no matter what. Felix wins because he gets a benefit worth $10,000 that he doesn’t have to pay tax on. He is better off by $4,500 with the car instead of cash salary. -

Actually he will be $18,818 - $5,500 = $12,681 better off with the car benefit instead of the cash salary.

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He would need to earn $18,181 = $10,000 x 1/(1- 0.45) extra to have $10,000 left over after tax is taken out at 45%

The government loses out on $4,500 in tax.

The FBTAA was introduced in an attempt to tax these benefits, which were provided to employees yet escaped tax. Note that the employer pays the FBT — not the employee, which overcomes the disclosure problem. The payment of FBT is an allowable deduction to the employer under s 8-1 of the ITAA97. Note that instead of introducing a fringe benefits tax, the government had alternatively considered introducing objective valuation rules coupled with compulsory reporting by employers; or denying employers a tax deduction for providing any fringe benefits. The problem with the latter scenario was that tax-exempt employers (including government employers) would not be affected, and that the effective rate of tax on the benefit would depend on each particular employer. A fringe benefits tax where the onus is placed on the employer means there are fewer taxpayers to monitor, which is easier for the ATO to administer. Note that FBT is a separate tax which has its own assessment act and ratings act – even though there is often reference back to the ITAA. The legislation tries to overcome the shortcomings of (the former) s26 (e) ITAA36 by defining the types of benefits covered; and by providing rules for valuing the benefits for taxation purposes.

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1.2

Terminology

Term FBT year

Meaning The FBT year runs from 1 April to 31 March. It is not aligned with the income tax year of 1 July to 30 June. The FBT year was intentionally set apart from the income tax year to spread the workload throughout the year. In practice, it would be more efficient to have the FBT year lined up with the income tax year.

Fringe benefit

To see if there is a fringe benefit, we need to check the definition of fringe benefit in s 136(1) FBTAA: 1. There is a benefit 2. provided during the year of tax 3. by an employer, associate, or third party arranger 4. to an employee or associate in respect of the employment of the employee.

Employer

The employer could be a previous, current or future employer: s136(1).

Employee’s associate

An employee’s associate is defined very widely. s136(1) defines an ‘associate’ as an associate of the employee under an arrangement or a relative, a partner, a spouse/child, trustee, or company. Also, see s 159 FBTAA and s 318 ITAA36.

Fringe benefits tax (‘FBT’)

FBT is not an income tax. Employees do not pay the tax on benefits they receive. Instead the FBT liability falls on employers, and is deductible for the employer under s 8-1 ITAA97.

FBT instalments

If an employer’s previous year’s FBT liability was ≥ $3,000, they pay an estimate of their FBT liability in quarterly instalments via their BAS (otherwise they pay annually). The FBT instalment quarter coincide with the PAYG instalment quarters and are due (or earlier for monthly BAS lodgers): 28 July 28 October 28 February 28 April Employers must lodge their annual FBT return and pay their tax liability by 31 May.

Reportable fringe benefits

This is a measure introduced in the 1999/2000 income year, where the grossed-up amount of the fringe benefits appears on employee’s PAYG payment summaries in order to take account of fringe benefits for social security payments purposes.

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2. IMPOSITION OF FBT

$ Reading:  Text at paragraph 26-100

2.1

Is there a fringe benefit?

As per the definition of ‘fringe benefit’ in s 136(1), the elements required are:

 There must be a benefit  Provided during the year  By an employer, associate, or third party arranger or other relevant person  To an employee or an associate  In respect of the employment of the employee. 2.1.1

Benefit

$ Reading:  Text at paragraph 26-110 The FBTAA defines ‘benefit’ in s 136(1). Benefit includes “any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility...” Certain employee benefits are expressly excluded from the definition of ‘fringe benefit’. The definition in s136(1) excludes:

2.1.2

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salary or wages;

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a benefit which is an exempt benefit;

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shares/rights acquired by an employee/relative under an

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employee share scheme;

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contributions to a superannuation fund;

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eligible termination payments;

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capital payments in respect of contracts in restraint of trade

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payments deemed to be dividends for income tax purposes

Provided during the (FBT) year

$ Reading:  Text at paragraph 26-110 “Provide” is defined widely in s 136(1) to include: ‘allow, confirm, give, grant or perform’.

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2.1.3

By an employer, associate, or third party arranger or other relevant person

$ Reading:  Text at paragraph 26-140 ‘Employer’ is defined in s 136(1) to mean a current, future or former employer. A ‘current employer’ is defined to mean a person who pays or is liable to pay salary or wages. Section 137 expands the definition to cover situations where an employee receives just non-cash benefits, which, if provided in cash, would be salary or wages. A ‘former employer’ is a person who has been a current employer. A ‘future employer’ is a person who will become a current employer. An ‘associate’ of the employer is defined widely in s 318 ITAA36 and further widened by s 159 FBTAA. A third party ‘arranger’ catches situations where the employer arranges with another entity to provide benefits for its employees. 2.1.4

To an employee or an associate

$ Reading:  Text at paragraph 26-150 ’Employee’ means a current, future or former employee. A ‘current employee’ is a person who receives/is entitled to receive salary or wages as defined s 136(1). An employee’s associate is defined very widely. See s 159 FBTAA. Employee vs Independent Contractor Refer to TR 2005/16 for the distinction between employee vs independent contractor. In Hollis v Vabu Pty Ltd 2001 ATC 4508, the Full High Court held that a pushbike courier was an employee rather than an independent contractor because he had no ability to generate goodwill; had little control over his work; and was required to wear the employer’s uniform. The impact was that the employer was responsible for PAYG withholding, FBT and Superannuation Guarantee obligations from the date of the High Court decision (8 August 2001).

2.1.5

In respect of employment

$ Reading:  Text at paragraph 26-160 ‘In respect the employment of the employee’ is a very important part of the test for a fringe benefit. The benefit must be provided ‘by reason of, by virtue of, or for or in relation directly or indirectly to’ the employment.

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There must be a nexus between providing the benefit and employment. The benefit must be provided “by reason of, by virtue of, or for or in relation directly or indirectly to” the employment. The mere fact of employment is insufficient. In MT 2016 the Commissioner states that section 148 is there to anticipate arguments that might otherwise be put forward, which might narrow the defined meaning of fringe benefit. A mere gift will not satisfy the nexus test if it is provided because of a personal relationship. See MT 2016 for the Commissioner’s opinion on the effect of s 148(1). Examples given by the Commissioner where there would be no fringe benefit include: 

where accommodation and meals are provided in the family home to children of a primary producer who works on the family farm;

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where birthday presents are given by parents to their children who work in a family business;

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where a wedding present is given to a child by parents where earlier the child had worked in the family business; and

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where parents give a child an interest-free or low-interest loan to purchase a matrimonial home.

! Frequent flyer/global point rewards are not subject to FBT as they result from a personal contractual relationship between the airline and the passenger, not an employment relationship.

2.1.6

Specific benefits

Once the benefit fits within the description above the legislation goes on to identify specific types of benefits and then gives each one its own valuation rules. The types of benefits covered are 

car benefit

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debt waiver benefit

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loan benefit

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expense payment benefit

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housing benefit

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living-away-from-home allowance benefits

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airline transport benefits

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board benefits

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entertainment benefits provided by tax exempt bodies

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car parking benefits

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property benefits (not covered in any of the above)

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residual benefits (not already covered in any of the above).

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2.2

Calculation of taxable value

$ Reading:  Text at paragraph 26-200 Once you have determined that there is a fringe benefit; you need to determine the fringe benefit’s ‘taxable value’. The taxable value is used to work out the fringe benefits tax payable. 2.2.1

Special rules for particular benefit type

First check the specific rules for that type of benefit to see the formula to work out the taxable value. 2.2.2

Exempt benefits

While still a fringe benefit, some benefits are exempt to minimise the cost of complying with the legislation, for example, notebook computers, or mobile phones used primarily in employment. These are found in the particular Division of the FBTAA that provides the calculation rules. There are also some more general exemptions listed in Division 13. 1.

Refer to the particular Division: Division 4 Loan Benefits: à s17 Exempt Loan Benefits Division 5 Expense Payment Benefits à s 21 Exempt accommodation benefits, etc.

2.

Division 13 lists a number of general exempt benefits. For example: s58A

Car expense payment, property or residual benefits provided in respect of employment interview or selection tests.

s58B-58F Relocation expenses s58G

Some motor vehicle parking benefits provided in connection with scientific, religious, charitable and public educational institutions.

s58H

The provision of newspapers and periodicals used for business purposes

s58K

The provision of in – house care facilities for employees

s58L

The benefit relates to travel to obtain medical treatment where the employment is in a foreign country.

s58LA The benefit relates to travel on the compassionate grounds of the death or illness of a close family member. s58M

The benefit consists of work – related medical examinations, medical screening, preventative health-care, counselling or migrant language training. The provision of emergency assistance for health care expenses.

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s58P

The provision of infrequent, minor benefits of less than $300 taxable value and which are minor having regard to a number of factors.

s58Q

Provision of long service award benefits provided certain conditions are met.

s58R

The provision of safety awards whose value does not exceed $200 per annum.

s58S

Some benefits provided to trainees engaged under the Australian Traineeship system.

s58T

Live in domestic workers employed by religious institutions or by religious practitioners.

s58U

Accommodation provided to a person providing live in help etc

s58V

Food and drink for non-live in domestic employees

s58W

Deposits under the Small Superannuation Accounts Act (1995)

s58X

exempts mobile or car phones primarily for use in employment, protective clothing required for employment, briefcases, calculators, tools of trade computer software etc.

s58Y

Subscription to a trade or professional journal; Membership for a corporate credit card; or Membership fees for an airport lounge subscription.

s58Z

2.2.3

Exempts taxi travel provided to employees to travel directly between work and home provided to sick or injured employee.

Recipient contributions

$ Reading:  Subsection 9-75(3) GST Act. A recipient’s contribution is an amount given to the employer by the employee (or their associate) to contribute towards the cost of the fringe benefit. The taxable value of the benefit is reduced by any contribution to the cost of the benefit made by the employee or recipients of the benefit. The contribution is set off against the private component of the benefit. Note there can be GST implications because of an employee contribution. This is because GST is only payable on a supply that constitutes the provision of a fringe benefit where a ‘recipient’s contribution’ is involved, in which case the price of the taxable supply is limited to the amount contributed by the recipient: s 9-75(3) GST Act 1999. However, s 9-75(3) only applies where the provision of the fringe benefit is a taxable supply – it does not apply where the provision of the fringe benefit is a GST-free or input taxed supply: GSTR 2001/3 para 27. Also, s 9-75(3) only applies where the recipient’s contribution is made directly to the employer, rather than to a third party supplier as payments made to a third party supplier constitute consideration for those supplies rather than for the supply of the fringe benefit.

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2.2.4

Otherwise deductible rule

$ Reading:  Text at paragraph 26-220 The otherwise deductible rule only applies to certain fringe benefits: s19:

Taxable Value of Loan Fringe Benefits

s24:

Taxable Value of Expense Payment Fringe Benefit

s34:

Taxable Value of Airline Transport Fringe Benefits

s37:

Taxable Value of Board Fringe Benefits

s44:

Taxable Value of Property Fringe Benefits

s52:

Taxable Value of Residual Fringe Benefits

The rule states that if the employee had been able to claim a tax deduction for the benefit had they paid for it themselves; the taxable value can be reduced by the otherwise deductible amount. The effect is that only the private portion of the benefit is taxed. The objective of the ‘otherwise deductible rule is to prevent double taxation – the value of the fringe benefit is reduced but the employee cannot claim a tax deduction for their contribution. The otherwise deductible rule only applies to employees, not to associates of employees (TD 93/90). EXAMPLE: Telephone account paid of $800, 60% business use, and employee contributes $100. Cost Less 60% business use Less contribution Taxable value

$800 (480) 320 (100) $220

(otherwise deductible amount: s 24) s 23

Note that the rule only applies to a once only deduction ; that is; the deduction cannot be spread over more than one year like (for example, depreciation). Also, the rule is not available unless appropriate declarations are provided by the employee to the employer.

 Review Activity 11-1: Co Pty Ltd pays an employee’s home phone account. At 31 March of the current FBT year, the total paid for the FBT year was $4,300 (including GST). The employee is on call and makes a lot of calls from her home phone. She kept a diary for 12 weeks that showed 40% of the calls were for business. Calculate the ‘taxable value’ of this benefit.

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 Review Activity 11-2: Refer to RA 11-1. Can the employee claim a tax deducti...